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Understanding the Importance of Life Insurance

Are you one of the 50% of Americans without life insurance? If so, it’s crucial to understand the implications. Without life insurance, your assets will be distributed to your heirs, but your loved ones won’t receive an insurance payout. This could leave them covering your funeral costs and unpaid debts on their own.

What Happens if You Die Without Life Insurance

When you pass away, your estate, which includes everything you own—investments, savings accounts, home, car, and more—will be distributed among your surviving family. If you have a will, it specifies who gets what. Without a will, your estate goes through probate, where a judge decides how your assets are distributed.

Your assets will be used to pay outstanding taxes and debts first. What’s left will go to your family. Even if you don’t have significant assets, life insurance can help your loved ones cover costs related to your death and their living expenses after you’re gone.

Expenses Your Family May Face Without Life Insurance

• Funeral Costs: The average funeral and burial cost is $7,848, according to the National Association of Funeral Directors. Without life insurance, your family will have to cover these costs.
• Lost Income: Without your income, your spouse might struggle to pay the mortgage or put food on the table. They may need to re-enter the workforce, or your child might have to drop out of college to help support the family.
• Lost Services: Stay-at-home spouses contribute unpaid labor such as housekeeping, cooking, and child care. The average cost of child care nationwide was $10,853 per year in 2022, according to Child Care Aware of America.
• Lost Benefits: If your family received health insurance through your job or you contributed to an employer-sponsored 401(k), losing these benefits can strain household finances.
• Future Expenses: Your death may make it harder for your spouse to save for major life expenses, such as your children’s college tuition or weddings.

What Happens to Your Debts When You Die?

Many people die with unpaid debt, whether it’s a mortgage, car loan, credit card debt, or something else. If your estate has enough money to pay all your debts, creditors will be repaid first, then your heirs receive the remainder. If there isn’t enough money, the court prioritizes which debts are repaid first.

Secured debt, such as a mortgage or car loan, takes priority. The lender might repossess the loan collateral unless the debt is repaid. Unsecured debt, like credit card debt, is typically discharged if your estate can’t repay it, but this isn’t always the case. For example, federal student loans will be discharged, but private student loans may not be.

Should You Get Life Insurance?

Life insurance costs about $360 a year on average. When does it make sense to get life insurance, and when can you skip it?

Single With No Dependents

If you are single with no dependents and no plans to have children, you probably don’t need life insurance. However, if you’re young and plan to marry or have children eventually, getting life insurance now could be a good idea. Term life insurance premiums are generally lowest when you’re young and healthy, so purchasing it in your 20s or 30s could lock in a low rate.

If you don’t need life insurance but want to prevent your parents from paying for your funeral, you can purchase burial insurance. This covers only the cost of your funeral and burial or cremation, usually paying out between $5,000 and $25,000.

Married and/or With Dependents

If you are married or have dependents, purchasing life insurance is usually a smart move. Life insurance payouts are protected from creditors, ensuring the money goes to your beneficiaries. Even if you have significant investments and savings, life insurance can provide additional security for your loved ones.

The Bottom Line

Life insurance can provide peace of mind by helping provide for your loved ones after you’re gone. Not everyone needs it, but if you decide it makes sense for you, a term life policy is usually the most affordable option. To save on life insurance, choose the right amount and type of coverage and shop around to compare prices.

Many states allow insurers to check your credit-based insurance score when determining your premiums. Having good credit could save you money. Before shopping for life insurance, check your credit report and score. Improving your credit could result in lower premiums.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your options with confidence and ease.

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